Current Account

Loading the player...

What is a 'Current Account'

The difference between a nation’s savings and its investment. The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. The current account and the capital account are the two main components of a nation’s balance of payments.

BREAKING DOWN 'Current Account'

A nation’s current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others.

Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.

The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).

Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under speculative attack during such times. This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion - combined with a deteriorating trade balance - puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.

Delve deeper into this major economic term by reading Exploring The Current Account In The Balance Of Payments.

RELATED TERMS
  1. Current Account Surplus

    A positive difference between a nation’s savings and investment. ...
  2. Current Account Deficit

    A measurement of a country’s trade in which the value of goods ...
  3. Trade Surplus

    An economic measure of a positive balance of trade, where a country's ...
  4. Basic Balance

    An economic measure for the balance of payments that combines ...
  5. Balance Of Trade - BOT

    The difference between a country's imports and its exports. Balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership ...
Related Articles
  1. Economics

    What does Current Account mean?

    The current account reflects the difference between a country’s savings and investments.
  2. Economics

    Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.
  3. Economics

    Current Account Deficit

    A current account deficit occurs when a country spends more money on the goods and services it imports than it receives for the goods and services it exports.
  4. Economics

    Twin Deficits: Twice The Fun For The U.S

    The U.S. has been running both fiscal and current account deficits for years, but what does it all add up to?
  5. Economics

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  6. Economics

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  7. Economics

    Interesting Facts About Imports And Exports

    Imports and exports exert a profound influence on the consumer and the economy. Learn what affects these figures, and in turn how these figures affect the economy.
  8. Economics

    What Is The Balance Of Payments?

    The balance of payments helps countries to track how much money is coming in and how much money is going out. Learn more about BOPs here.
  9. Economics

    How Imports And Exports Affect You

    Imports are an important indicator of an economy’s health. In a healthy economy, exports and imports are both growing.
  10. Economics

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
RELATED FAQS
  1. At what level is the current account deficit considered excessive, in terms of percent?

    Take a deeper look at the variables that impact current account deficits, and learn why not all types of deficits have equal ... Read Answer >>
  2. What's does the current account have to do with the trade balance?

    Learn how a nation's trade balance is factored into its current account, and the differences between these two common terms. Read Answer >>
  3. What is a trade deficit and what effect will it have on the stock market?

    A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing ... Read Answer >>
  4. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms current account deficit and trade deficit, and understand the differences between ... Read Answer >>
  5. What's the difference between the current account and the capital account?

    Learn the difference between the current account and capital account in the balance of payments. Compare and contrast their ... Read Answer >>
  6. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center